Tomorrow’s Latin America Won’t be Won with Yesterday’s Playbook

Frontier Strategy Group is witnessing a dizzying array of changes to the business landscape in Latin America. Some are highly visible shifts in the external political and economic conditions in key markets such as Brazil, Mexico, and Venezuela, to name a few, while others involve subtle evolutions in internal corporate mandates for Latin American business units of multinational corporations. For this reason, FSG recently released a new Regional Overview of the factors influencing the results of our clients as well as emerging trends likely to impact performance and shape strategy for the coming years. The research is drawn from extensive interviews with senior executives at leading multinationals, independent experts, and analysis of surveys of FSG’s client base. Below are featured trends from the report, accessible to FSG clients:

Economic Performance is Strong, but Risk – and Skepticism – is Growing
Compared to global averages, and even in comparison to other emerging market regions, Latin American growth remains, in the aggregate, relatively robust. Yet many industries in Latin America in 2012 either just met or underperformed expectations, and now with a persistent slowdown and protests in Brazil and crisis always on the horizon in Venezuela and Argentina, skeptics are growing louder, forcing executives to justify further investments in the region. Furthermore, FSG’s data indicates that slow growth in Argentina, a weak Q1 in Mexico, and the devaluation in Venezuela threaten goal attainment of sales targets in 2013 as well.

2013 Performance Targets in Key LATAM Markets

2012 Sales Performance by Sector in LATAM

Latin America Splitting into Two Distinct Groups: Pacific and Atlantic
The dynamic Pacific economies are integrating rapidly, as evidenced by the creation of the Pacific Alliance trade group, creating new trade dynamics and opportunities for increasing scale and reorienting supply chains. In contrast, the Atlantic economies are increasingly insular and crisis prone, a trend typified by the increasingly dysfunctional Mercosur customs union. These distinctions are growing and becoming more tangible as companies position to mitigate risk from reliance on Mercosur and maneuver to gain from new opportunities presented by the Pacific Alliance.

The “Grow-fast, Worry about Profitability Later” Days are Coming to an End
Many executives perceive a strong shift in corporate mandates for Latin American business units towards bottom line results, rather than purely on top line growth. This shift is changing the way executives prioritize markets, evaluate organizational structures, measure and orient workforces, and make the case for resources.

New Blueprints for Success
As both internal corporate and external dynamics have changed, senior executives are drawing up new blue-prints for success by examining existing assumptions around optimal organizational footprints and structures and by prioritizing markets and communicate opportunity based new criteria such as relative profitability and operating margins.

3 Year Growth Outlook v Relative Profitability

FSG’s LATAM Regional Overview expands on these trends and shares analysis of client survey responses on how they are responding to these shifts. FSG believes that despite increasing volatility and growing macroeconomic and political risks, Latin America continues to offer excellent opportunities and high returns relative to other regions. That said, today’s business environment already is significantly different from that of just a year or two ago, and regionally-focused executives are wise to recognize that their strategies must evolve in tandem.

US-Colombia FTA Stumbles Out of the Gate, But Trade is a Marathon, not a Sprint: Highlights from FSG’s Bogota Interview with Expert Advisor Juan David Barbosa

Despite general optimism at the opportunities provided by the new US-Colombia Free Trade Agreement, FSG clients have reported unwelcome delays and roadblocks in efforts to take advantage of the agreement, as noted in our recent Quarterly Market Review of Colombia.

On a recent visit to Colombia, I sat down with FSG Expert Advisor Juan David Barbosa to discuss the first 9 months of implementation of the accord. Juan David specializes in trade law at the Bogota law firm of Posse, Herrera, and Ruiz, and previously served as the Deputy Director of Trade Remedies at the Ministry of Commerce of Colombia. Juan David has advised numerous multinationals on trade and market entry in Colombia, and was the featured expert in last year’s FSG teleconference on the new agreement.

The Promise

According to Juan David, the FTA’s would change the landscape for FSG clients, particularly those based in the United States or importing products to Colombia from the United States in the following ways:

  • Import tariffs on 80% of U.S. exports to Colombia would drop to zero, including strategic industries such as agriculture, construction, auto and aviation parts, medical products, and IT.
  • Legal and regulatory hurdles would fall as companies no longer needed local branches, suppliers were afforded more protection, and new rules made it easier to exit agreements with local companies.
  • Many of the key provisions of the agreement would enter into force between September of 2012 and March of 2013.

Because of these sweeping changes, 90% of FSG clients expected the FTA to be a factor in increased investment for their companies in Colombia, and 54% of FSG’s expert advisors said the FTA would provide significant advantage for US companies over competitors from other countries without such an agreement.

The Problem

According to Juan David, and in line with recent experiences of FSG clients, Colombia is lagging in implementation of a number of key provisions:

  • Intellectual property rights protections
  • Increased safeguards in agency agreements for multinationals
  • New rules on taxes of alcoholic drinks
  • Electronic certification of origin
  • Rules on urgent shipping requests
  • Implementation of sanitation codes equivalent to the United States

Accordingly, multinationals expecting the FTA to be a panacea for bureaucratic and logistical headaches are growing frustrated with delays of their products at customs and an unclear regulatory and compliance environment.

The Causes:

  • Bureaucratic Entropy:
    • The root of the problem, says Barbosa, is not with laws and regulations now on the books, but rather with the capacity and will of the institutions charged with enforcing and acting under them. Comprehension and processes to enact the new rules is lagging the actual implementation timelines. In short, Colombia’s bureaucracy has not kept pace with the rapid evolution in the rules of the game.
    • Infrastructure Constraints:
      • Likewise, the boom in trade with Colombia has created a parallel capacity constraint in logistics infrastructure. Ports and roads are clogged with an influx of goods. Construction and investment, while significant, has yet to catch up with the expansion in trade (see map below).
      • Protectionist Backlash:
        • Also concerning are recent import tariff hikes slapped on certain sectors of imported goods such as garments, textiles, footwear, agricultural goods, paper products, and some used machinery. While these don’t necessarily violate existing FTAs, they are indicative of political pushback from domestic manufactures threatened by the growth in imports. New free trade agreements, which have come into effect at the same time as a strong appreciation of the Colombia peso, have led to politically powerful domestic producers seeking relief in the form of protection and safeguards from the government.

Colombia port map

The Outlook

The good news is that the Colombian government has recognized that it may have bitten off more than it can currently chew in regards to implementing multiple trade agreements over a short amount of time with limited bureaucratic resources. In response, the government has spaced out the implementation processes of current and upcoming agreements and will promulgate new guidelines by mid-May, 2013. This may buy U.S. based companies more time with a head start in Colombia as upcoming FTAs between Colombia and the EU and South Korean could take longer than anticipated to come into full effect.

Less promising is the outlook for short term improvements in infrastructure bottlenecks. Though the government is currently investing heavily in construction of fixed infrastructure assets, project cycles are long and payoff takes years. Even here, the pace of investment has been hampered by bureaucratic constraints, as the second half of 2012 saw construction spending stumble because of poor project planning and lack of capacity to execute on the ambitious agenda.

Fears of a broader protectionist backlash are probably overblown. Colombia has a strong political orientation towards free trade, and is eager to establish itself as one of Latin America’s most open economies. All politics are local, however, and local producers have shown they have the power to win temporary measures to shield themselves from competition in certain cases. Multinationals, no matter the industry or the country of origin, would be wise to monitor the local political winds to anticipate if their products could be on the wrong side of a tariff.

The Big Picture

Despite these early difficulties, Juan David remains optimistic; “The FTA will mature and offer excellent opportunities for U.S. corporations. Both for more established multinationals and newer entrants, Colombia remains an excellent investment destination. In fact, Colombia is an increasingly attractive place for U.S. companies to open their first emerging markets operation. For now, however, the FTA is less than a year old. It is still a newborn baby and has a lot of growing up to do”, stresses Juan David.


Juan David BarbosaJuan David has more than 10 years of experience in customs and international trade proceedings and litigation, as well as in the development of import-export tax efficient strategies. Juan David has also worked in several international unfair trade practices (dumping) and safeguard investigations, as well as in the negotiation and implementation of free trade agreements. Before joining Posse Herrera & Ruiz, he worked in the Colombian Government as Deputy Director of Trade Remedies at the Ministry of Commerce, Industry and Tourism where he was responsible for all anti-dumping and safeguard investigations. He has a JD and a graduate degree in Taxation from Pontificia Universidad Javeriana and an LL.M. in International Business and Economic Law from Georgetown University.



Argentina: Trade Restrictions and Policy Uncertainties


The recent imposition of additional trade restrictions coupled with economic policy uncertainties in Argentina continue to cast doubt onto the country’s economic outlook for 2012. Our clients and experts expect operational conditions to further deteriorate as surging government spending and minimal political opposition allows President Kirchner’s administration to continue on this volatile path. This volatility is leading many MNC executives to adopt a “wait-and-see” approach when conducting operations in Argentina. Indeed, 57% of FSG advisors reported being concerned about economic stability in Argentina, while 59% of clients believe in a likely economic crisis within the next 18 months.

Argentina’s troubles stem from high government spending, which has eliminated previous years of budget surplus while pushing upwards pressure on inflation.  An appreciating peso has been boosting imports at the expense of the trade balance and further contributing to the budget deficit. The increase in non-automatic import licenses and the Argentine government’s demand for import pre-approvals has further complicated multinational operations in an already challenging economic environment.  Judging by the positive Argentine public response to the nationalization of YPF it is hard to expect the Argentina government will adjust its restrictive course and instead apply economic austerity programs.

Despite increased restrictions, import strategies like engaging in government relationship building or increasing local production can potentially reward companies willing to take the risks. Finding locally produced products to export (or countertrading) can help companies come in line with Argentine government demands.

There are two likely scenarios to consider over the next 18 months: economic crisis or economic rebalancing. Under a worst-case scenario, Argentina will continue to muddle through with the current policies it has in place until the economic imbalances worsen to the point where a crisis ensues. A more positive scenario envisions Argentina enacting politically difficult austerity and a gradual devaluation of the peso that would set the economy on track for long-term economic growth and stability. At this point it is difficult to say which of these scenarios will likely prevail, but the fact that improvement will require Argentina to endure near term pain to achieve long-term gain does not bode well for multinationals.

*Erick Soto contributed to this piece

Government Engagement in Asia – What Executives are Saying

Threats and Opportunities Await MNCs in Turkey

Explosive deterioration of its relationship with Israel. A trip of the post-Arab Spring Middle East. Turkey’s foreign policy is generating quite a lot of attention in the Middle East these days.

Beyond its political implications; however, the policy of courting key Middle Eastern countries like Egypt also has a serious domestic driver: Turkey’s economy is charting precarious waters.

Turkey has been struggling with a rising current account deficit driven by strong domestic demand. The rise in household consumption has been financed by capital from Europe, making Turkey increasingly vulnerable to an outflow of short-term capital as European economies continue to struggle.

The other pillar of Turkey’s economy – exports, is also threatened by the potential of a Eurozone recession. With over 50% of Turkish exports going to the EU, Turkey is particularly vulnerable to a drop in demand from such key countries as Germany, Italy, and Spain. FSG Monitor estimates that a US-EU recession would lead to a 2% drop in Turkey’s GDP in 2012. The projected decline may not be as dramatic as in other countries in the region, but compared to Turkey’s Q1 2011 11.6% GDP growth, followed by 8.8% for Q2 2011 (Turkey had the highest H1 2011 GDP growth in the world), it’s very significant.

In this unstable environment, the Turkish government has announced it will seek to promote export-oriented domestic production. But this strategy will only work if there is enough demand for Turkey’s increased exports. With the European economy in a shaky state, Middle Eastern markets will be increasingly instrumental to Turkey’s economic stability. Currently, the Middle East is the second biggest regional market for Turkish exports, accounting for 20% of the country’s exports, plus another 4.9% of exports going to North Africa.

Turkish businesses are clearly seeing the writing on the wall and are aggressively seeking expanded influence in the Middle East, as evidenced by Prime Minister Erdogan’s large business delegation on his recent trip to Egypt and his promise to increase trade between the two countries to US$5 billion.

In this context, MNCs should expect Turkish competitors to aggressively pursue opportunities in the post-Arab spring markets. As we already discussed, MNCs with overly risk-averse strategies in the region can fall behind regional competitors with a greater risk appetite. It also means, however, that MNCs with Turkish partners can use these relationships in support of strategic expansion in the MENA region, benefitting from the good will Turks are enjoying among the region’s populations and leadership.

In this context, the role of Turkey as a manufacturing hub for the Middle East and North Africa region is becoming increasingly attractive, not just to MNCs but also to the Turkish government itself. As a result, MNCs with local production facilities meant for export to the region are well-positioned to lobby the Turkish government for additional incentives and support.

Latin America Insulated from Global Shocks


Brazil’s Impact on Latin America Trade


Latin American executives are reporting lost opportunities and revenue due to increasing trade restrictions on imports into Brazil. Costs and frustrations are mounting for businesses dependent upon a smooth flow of commerce across Brazil’s borders, forcing a reconsideration of previous business models due to critical vulnerabilities to import restriction. In this interview Clinton Carter, Frontier Strategy Group’s Director of Latin America Research,  discusses the impact of Brazil trade restrictions on the Latin American region.

Brazilian Trade Disputes Challenging Latin America-Focused Executives

Frontier Strategy Group’s Latin American clients are reporting lost opportunities and revenue due to increasing trade restrictions on imports into Brazil. Costs and frustrations are mounting for businesses dependent upon a smooth flow of commerce across Brazil’s borders, forcing a reconsideration of previous business models due to critical vulnerabilities to import restriction.

In a recent example, Argentine auto parts piled up at customs on one side of the Argentine-Brazilian border, and on the other side, Brazilian white goods gathered dust in crates awaiting processing. Skyrocketing demand for appliances went unmet in Argentina, and automakers, already straining to meet production targets for the Brazilian market, missed critical opportunities to capitalize on the country’s boom in car ownership.

At their core, such disputes stem from the imbalances brought on by the persistent strength of the Brazilian real. The strong Brazilian currency is making imports cheaper and threatening the competitive position of Brazilian industry. As the Brazilian real has climbed in value over the last several years, import volume and value has followed, creating competitive pressure on the normally insulated Brazilian industry sector. In response, influential Brazilian industry groups are pressuring the new Dilma administration to restrict imports and protect their businesses. These pressure tactics are bearing fruit, and the government has applied a variety of non-tariff trade barriers such as denial of import licenses and postponement of customs processing.

To illustrate the strategic business implications of this situation, consider that in the first quarter of 2011, in response to the real’s appreciation, 28% of Frontier Strategy Group executive poll respondents reported shifting sourcing to cheaper markets for import of goods into Brazil. Argentina was the primary beneficiary of this business. But Argentina has emerged as the most obvious target for Brazilian import restrictions, as Argentina is also using its own import restrictions, in this case to protect currency reserves from a surge in imports brought on by an overheating economy. The result has been a series of tit-for-tat trade restrictions enacted by the neighbors, paralyzing trade in certain goods and damaging the top line for executives expected to meet meteoric targets for growth in Latin America in 2011. Additionally, it is not just imports from Argentina that are targeted for restriction: increasingly, goods from nations such as China and Mexico are subject to anti-dumping investigations and delays at the border.

In terms of practical steps, Brazil and Latin America-focused executives are advised to identify inputs and products that may be vulnerable to trade restrictions and develop backup sourcing strategies; this is particularly important for at-risk industries such as farm equipment, furniture, footwear, textiles, and auto parts and automobiles. In the meantime, companies may be forced to look at sourcing inside Brazil and compensate for the expensive real through further price increases passed on to customers, traditional financial hedging strategies, and additional resources devoted to government relations and import and export regulation compliance.